Settlement Discount Granted

by Richard
(Pretoria, South Africa)

Q: How does a settlement discount granted affect the debtors column on the cash receipts journal?

Just to clarify for anyone reading, a settlement discount (also known as a cash discount ) is a discount given to a customer (debtor) for paying (settling) their account early or by a specific point in time.

For example, you give Joe Shmoe 60 days to pay you, but if he pays within 30 then he gets a 10% discount. This 10% discount is a settlement or cash discount.

Richard, let me use an example to answer your question:

Donnie's Furniture Manufacturers sells furniture to a retailer, Joe Furniture, for $5,000 (on credit). 10% discount is allowed if payment is made within 30 days.

From Donnie's point of view, to start with we record the $5,000 in our sales journal (sale on credit). We could also show this as:

Dr Debtors Control $5,000
Cr Sales $5,000

Joe Furniture pays $4,500 a week later in full settlement of the bill.

Donnie's records $4,500 in the cash receipts journal (under both the "bank" and "debtors" column). This could be shown as:

Dr Bank $4,500
Cr Debtors Control $4,500

The remaining $500 is recorded in the
general journal . The entry is:

Dr Discount allowed $500
Cr Debtors Control $500

Discount allowed is an expense for Donnie's Furniture Manufacturers.

Baie dankie vir jou vraag Richard :)

For more info on the cash receipts journal see the
lesson on accounting journals.

Good luck!


Comments for Settlement Discount Granted

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by: Anonymous

WHAT HAPPENS IF HE IS ALLOWED SETTLEMENT BUT DOES NOT TAKE IT? YOU HAVE REFLECTED THE SALE AT A LESSER VALUE in your income statement, THEN He gets tight on cash and pays normal terms.

Great Work
by: accounting mississauga

Very informative stuff, very simple to understand. Thanks for sharing your knowledge.

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